If you are trying to get rid of your debt or are about to take out a loan, you will want to know the difference between secured and unsecured debt to create a well-designed repayment plan. Understanding the type of debt you face is especially important in determining which debt to pay off first if your budget is tight. Read on to learn more about the basics of secured vs. unsecured debt, and what you need to know about how unsecured debt is collected and ways to create a debt repayment plan. solid.
What is secured debt?
Guaranteed debts are protected by an asset. For example, a car, motorhome, or house would be considered secured debt. If you’re late and stop making your car loan or mortgage payments on time, your home could be foreclosed or repossessed by your lender.
What is unsecured debt?
Unsecured debt can include student loans, medical bills, payday loans, and credit card debt. Unlike secured debt, lenders can’t collect your assets if you don’t pay the debt you owe, but they can report your overdue payment to negatively impact your credit score or sue you to seize your debt. salary.
What happens if you don’t pay your debt?
Don’t ignore your debt, advises Katie Ross, education and development manager at American Consumer Credit Counseling, headquartered in Newtown, Massachusetts. âAll these bills that are piling up have to be paid, and the longer you wait, the more complicated and complicated your debt problem becomes,â she says.
For example, if you have secured a debt, such as your house, car, boat, or motorcycle, and you stop making payments, a lender might put a lien on the asset. The lender would then hunt you down if you stopped making payments. With a home, you would likely experience a foreclosure, where the deed goes to the lender, and you would find yourself forced to move out and sell your home.
If you neglect to pay off unsecured debt, your assets are unlikely to be recovered by a lender. But if you stop making payments, you could be hassled by debt collectors who call you, email you, and text you to try and convince you to pay off the debt. If you’re late on credit card payments, you can also expect to receive late fees and see your interest rates go up. If you are in arrears with your payments, just as your interest rate rises, your credit score will start to drop, making it harder to borrow more money in the future. You could also be sued by your lender, and if you don’t start a plan to make monthly installment payments, your paycheck could be foreclosed.
How to pay off debt on a tight budget
If your credit score hasn’t gone down yet, you might consider refinancing your mortgage or car loan to get a lower interest rate or lower monthly payment. The main drawback: In the long run, for this financial relief, you could end up paying more than you should have during the life of the loan. It is also important to pay the secured debts on time. There is nothing wrong with having secured debt, especially for an asset like a house or a car. But if you’re struggling to pay for things and have a boat or motorhome that you can’t afford to pay for, you might want to sell them to pay off the debt.
With unsecured debt, experts generally favor the snowball or avalanche approach. Ross explains the strategies this way: âThe debt avalanche focuses on paying the debts in order of the highest interest rate and the debt snowball focuses on paying the smallest first. balance, while making minimum payments on larger debts. You still continue to make minimum payments on debt each month, she adds.
Phillip Dickson, co-CEO of Vimvest Advisors, a wealth management and financial planning firm in Sarasota, Fla., Is a proponent of the debt snowball method, although the calculations often favor the approach. the avalanche of debt. âIf you’re swamped with unsecured debt, like credit cards, (it’s) a simple fix,â says Dickson, referring to the debt snowball strategy.
âLet’s say you have three credit cards totaling $ 1,500, $ 2,500, and $ 5,000. First, you need to determine a budget that is right for your situation, so that you can make minimum payments on all three cards. Then once the smaller credit card is paid off, you take the same payment and add it to the second larger credit card, âsays Dickson.
After the second card is redeemed, Dickson suggests combining the two payments on the third credit card. “Before you know it, you’ll have all of your credit cards paid off. It creates a calculated snowball effect that helps build momentum while staying on budget. Of course, this can vary depending on your situation.”
Others prefer the debt avalanche method, which focuses on payments with the highest interest rate. This can be overwhelming for some, as progress may seem slow, but if you are careful with your credit card statements and not using your credit cards to accumulate more debt, you should pretty quickly start to see that you are get ahead of what you owe.
Whatever debt repayment strategy you use, the key is to pay it off consistently. Keep in mind that the money allocated for your debt is not allocated to your savings account, your retirement, or your child’s college fund. To avoid feeling insecure and take control of your finances, assess which approach is right for you and hold yourself accountable.